Barron’s Weekend Summary: With the economy softening and financial anxieties on the rise, the stakes are unusually high for a US midterm election
Cover Story:
-With the economy softening and financial anxieties on the rise, the stakes are unusually high for a US midterm election. Control of the White House will remain with President Joe Biden, a Democrat. But lawmakers control the country’s purse strings, and the next Congress will call the shots on a range of critical issues, from whether to send more aid to Ukraine as it battles Russia to how to steer the economy through a potential recession. “The policy and market implications really couldn’t be more dramatic,” says Chris Krueger, managing director of the Cowen Washington Research Group.
Interview:
-Barron’s interviews Nicholas F. Galluccio about the outlook for small-caps and where he is finding value, from a regional bank in Dallas to a refurbisher of aircraft parts. Longtime investor Galluccio has seen his fair share of market turmoil, but one thing has remained constant over nearly four decades: a focus on finding small stocks with big prospects. Galluccio is a portfolio manager at Teton Advisors, a $1.6B asset manager that specializes in small- and microcap stocks. He joined the firm, majority-owned by Mario Gabelli, a member of the Barron’s Roundtable, in 2008. A year later, he helped lead the spinoff of Teton from Gabelli’s Gamco Investors (GAMI), and served as CEO until 2021. Galluccio got his start in small-cap land in 1984 at Trust Company of the West, and hasn’t looked back since. “I found that I could add tremendous value by understanding smaller companies, since Wall Street research on that sector was scant, to say the least, and it has gotten even less so,” he says.
Tech Trader:
-Mark Zuckerberg is destroying shareholder value and his own reputation. Investors have had enough, but Zuckerberg maintains voting control of the company he started. There’s no way to stop him. On Wednesday afternoon, Meta disclosed a stunning third-quarter earnings report. Everyone knew that conditions were difficult—Meta, the parent of Facebook, Instagram, and WhatsApp, faces growing competition from TikTok, impaired ad targeting capability due to Apple ’s privacy restrictions, and a softening advertising market.
The Trader:
-The Dow has jumped 14.4% in October and is on pace for its best month since January 1976, when the blue-chip benchmark surged 14.41%. The other indexes have fallen short of those gains: The Russell 2000 has climbed 11%, the S&P 500 has gained 8.8%, and the Nasdaq Composite has risen a paltry 5%. That kind of outperformance by the Dow against the Nasdaq doesn’t happen very often. The Dow has outperformed the Nasdaq by more than nine percentage points this month, the most since February 2002, when it outperformed by 12.35 percentage points, and the seventh-largest monthly gap in 45 years. Blame the NASDAQ’s underperformance on its biggest stocks. This past week saw Meta Platforms shed 24% of its value, while Alphabet dropped 4.8%, Amazon.com fell 13%, and Microsoft slid 2.6%, all after reporting earnings. Only Apple, which rose 5.8% after reporting its results, finished the week higher.
-If President Xi Jinping’s consolidation of power in China demonstrates anything, it is that the old model of building products in Asia and shipping them back to America is no longer viable. While Xi places political gains over economic ones, the US appears ready to back a zero-China policy, says Gavekal Research’s Louis Vincent Gave. A zero-China world will have major repercussions. Gave notes that Chinese companies probably won’t want to buy US products—and not just chips. If the US can block chip sales, it can block sales of just about anything, which makes it unlikely that Chinese companies will want to buy a Boeing 737 Max or a Caterpillar truck when alternatives are available. “A zero-China world is a world in which US companies will struggle to sell more into China,” Gave writes. “It is a world characterized by weaker global trade and lower productivity.”
Features:
-Visa stock has been hit hard by the market selloff, but its earnings suggest that it has been hit too hard. For investors looking for quality at a reasonable price, Visa fits the bill. The 2022 pullback in the stock market has been almost indiscriminate, denting shares of companies both good and bad. Visa appears to be one of the former, a good stock that has slid 20% from its record high in July 2021, versus a 13% decline by the S&P 500 index in the same period. At a recent $203, shares are back near levels they hit in January 2020, before supercharged growth in digital payments drove shares during the Covid-19 pandemic.
-The Nov. 8 midterm election will decide whether Democrats retain control of both chambers of Congress, or Republicans win power in either—or both. Much is riding on that outcome, from tax policy to defense spending to the likelihood of a debt-ceiling fight. And much is at stake for the markets, as well. If the GOP takes either the House of Representatives or the Senate, expect no new taxes and no inflationary fiscal spending over the next two years. If Democrats retain control, the focus will be on passing social spending legislation and, potentially, raising taxes to pay for it.
European Trader:
-Dutch semiconductor-equipment maker ASML Holding has had a rough year as inflation sparked a consumer slowdown and a slump in demand that has weighed on the industry. ASML stock has lost 30.3% this year, to EUR 493.60 ($486.32). But some upbeat developments could drive the price higher. ASML is a leading manufacturer of lithography machines used by major semiconductor makers to print dense circuits used in everything from smartphones to autos. The company has pioneered extreme ultraviolet lithography, or EUV, which uses light with a shorter wavelength to etch smaller features, resulting in faster and more powerful chips. Taiwan Semiconductor, ASML’s biggest customer, warned in October of a cut to capital expenditure, noting weaker demand. Also, the US has new rules limiting the export of chips and related equipment to China. But the bulk of ASML’s revenue comes from machines making less sophisticated deep ultraviolet technology, or DUVs, which are unaffected by restrictions. And it doesn’t sell its EUV technology in China.
Emerging Markets:
-For many US companies, decoupling from China poses real difficulties. For their Japanese counterparts, it’s more like Mission Impossible. If Xi Jinping’s authoritarianism is shaking Tokyo’s post–World War II commitment to pacifism. It hasn’t affected economic ties much yet. Beijing is Tokyo’s top trading partner, with bilateral trade clocking in at $164B last year. For the US, China is dwarfed by Canada and Mexico. “Japan can’t survive economically without China’s business, even if it’s becoming more difficult to continue business as usual,” says Shigeto Nagai, head of Japan economics for Oxford Economics. Japan Inc. has tried to diversify. But investment has shifted only marginally to lower-cost Asian nations like Thailand and Vietnam. And Japan’s highly developed, if stagnant, economy remains a symbiotic fit for China’s dynamically developing one. Toyota Motor, for instance, is building an electric vehicle plant in China, joint venturing with internet giant Baidu on autonomous cars, and researching hydrogen fuel cells with Chinese partners.
Commodities:
-Exxon Mobil, the biggest US energy company, reported the highest profits in its 152-year history on Friday. The oil and gas giant said adjusted third-quarter earnings were $18.7B, or $4.45/share, on revenue of $112B. Analysts were expecting adjusted earnings per share of $3.86 and revenue of $105B. It was the second consecutive quarter of bumper profits for the firm, which has benefited from increases in energy prices this year. Shares climbed more than 2% in premarket trading but traded flat after the market opened. Exxon also announced a dividend hike to take effect in the fourth quarter. The company raised the quarterly dividend by 3 cents to 91 cents per share. After the hike, Exxon’s dividend yield is 3.4% at the current stock price, in the middle of the pack for large oil companies.
Streetwise:
-This week Jack Hough asks: Is China uninvestable? China has a billion people, one fellow explained. Its economy is small, but it’s embracing capitalism and freedom, so it’s bound to soar. Investing there now is like getting in early on US shares. Thirty years ago this past week, Eaton Vance launched a US mutual fund for investing in China. To its credit, Eaton Vance Greater China Growth has returned nearly 5% a year since inception, while the broad Chinese market has made next to nothing. But the US market has returned 10% a year. What went wrong? Not growth. China’s economy soared, just like the wholesaler said, even without capitalism. But studies over the years have blown holes in the assumption that gross domestic product and stock returns are closely linked. Today, US investors have their pick of world-class Chinese companies that trade on US exchanges, and a two-year rout has left many of them looking cheap. Alibaba Group Holding, has generated $89B in free cash over the past five years, versus $75B for Amazon. Its shares are lower than their debut price in 2014.